Greenworld Case SOLUTION

8/9/2019 Greenworld Case SOLUTION

1/23

FORT GREENWORLDMAHAM IBRAHIM L1F11BBAM2024

AHSAN EJAZ L1F11BBAM2164

SUBMITTED TO : PROF. EESHA TARIQ

SECTION : B

SUBJECT : FINANCIAL ANALYSIS


2/23

QUESTION 1(A)Calculation of NPV of modernizing the existing paper mill:

If actual cash flows are used

Investment required for the modernization = $154,700,000

Required rate of return = 12

!earl" cash flow after ta# deduction = $40,%4,&0 'for 20 "ears(

)et *resent value = +0 *resent value of all future cash flows of 20 "ears

)-. = %0%,51&,451/5 154,700,000

NPV = $1!"!1!"#1#

(%) Calculation of NPV for &uilding a ne' paper mill

Investment required for the modernization = $1&,&00,000


!earl" cash flow after ta# deduction = $107,72&,000 ' for 20 "ears(

)-. = &04,&,222/& 1&,&00,000

NPV = $1!#"!!"!

With Incremental Cash Flows

(A)Calculation of NPV of modernizing the existing paper mill:

Investment required for the modernization = $154,700,000


!earl" cash flow after ta# deduction = $40,%4,&0 'for 20 "ears(

Incremental cash flow= $ 40,%4,&0 $ 11,422,%20 = $2,212,%0

)et *resent value = +0 *resent value of all future cash flows of 20 "ears


3/23

Casio calculator

a) Cash &utton

&) *+ = 1+

c) Cash= ,editor x

-

1 .1#/00000

2,212,%0

2,212,%0

2,212,%0

# 2,212,%0

2,212,%0

/ 2,212,%0

! 2,212,%0

2 2,212,%0

10 2,212,%0

11 2,212,%01 2,212,%0

1 2,212,%0

1 2,212,%0

1# 2,212,%0

1 2,212,%0

1/ 2,212,%0

1! 2,212,%0

12 2,212,%0

0 2,212,%0

1 2,212,%0


4/23

d) NPV = sol3e

e) NPV = $ "#00"0/1#

(%) Calculation of NPV for &uilding a ne' paper mill

Investment required for the modernization = $1&,&00,000


!earl" cash flow after ta# deduction = $107,72&,000 ' for 20 "ears(

Incremental cash flow =$107,72&,000 $ 11,422,%20 = $ ,%05,&0

)et *resent value = +0 *resent value of all future cashflows of 20 "ears

Casio calculator

a) Cash &utton

&) *+ = 1+

c) Cash= ,editor x

-

1 .1&,&00,000

,%05,&0

,%05,&0

,%05,&0

# ,%05,&0

,%05,&0

/ ,%05,&0

! ,%05,&0

2 ,%05,&0

10 ,%05,&0

11 ,%05,&0

1 ,%05,&0


5/23

1 ,%05,&0

1 ,%05,&0

1# ,%05,&0

1 ,%05,&01/ ,%05,&0

1! ,%05,&0

12 ,%05,&0

0 ,%05,&0

1 ,%05,&0

d) NPV = sol3e

e) NPV = $ 100"#2"!#0

his shows that )-. of new *a*er mill is hi3her than that of modernization of the e#istin3

facilit"/ hus, usin3 )-. rule demonstrates that new facilit" is etter for the firm/

QUESTION 2:

With Incremental Cash fows

(A)Calculation of *44 of each in3estment

*44 of 5odernization of existing mill :


6/23

sin3 the +asio calculator where the cash flows and the initial investment was entered we move

on to the

IRR = solve

IRR = 1&/21

*44 of ne' paper mill:

sin3 the +asio calculator where the cash flows and the initial investment was entered we move

on to the

IRR = solve

IRR = 14/5%1

6ccordin3 to IRR rule the firm should invest in the modernization of the e#istin3 *a*er mill as it

has a hi3her IRR /

(%) Calculation of the pa6&ac7 period of each in3estment

Pa6&ac7 period of 5odernization of existing mill :

Initial investment annual cash flows

= $154,700,000$40,%4,&0

= %/&07 "ears

Pa6&ac7 period of ne' paper mill:

Initial investment annual cash flows

= $1&,&00,000$107,72&,000

= 5/744 "ears

6ccordin3 to *a"ac8 rule the investment made in the modernization of e#istin3 *a*er mill will

e recovered earlier then the investment in the new *a*er mill/


7/23

IRR With Actual Cash fows

*44 of 5odernization of existing mill :

Investment= $154,700,000

+ash flows= $40,%4,&0

IRR = 9:;. Bi#ed cost *er "ear

'includes de*reciation(

($12"!0"000) ($#"00"000)

;ess> variale cost *er "ear !1 x 100 x 0=

($11"!/"00)

/# x 00 x 0=

($1!0"1!0"000)


16/23

QUESTION !:(A) Calculating operating cash flo's

1st 5year cash flows would be:

5odernization the old mill %uilding a ne' mill

;ales $1,50,000 $%0,%0,000


17/23

NPV 1/0"0"/0 /1"!//"2

*44 22!+ 12/+

'?(

@! (&) 5odernization the old mill %uilding a ne' mill

NPV (dep for 0 6ears) $ 1!"!1!"#1# $ 1!#"!!"!

NPV (dep for # 6ears) $ 1/0"0"/0 $ /1"!//"2

NPV change $ 1"#0"#1/ $ !"002"00!

NPV change + 1#+ +

I Incremental Cash fows are used with Dereciation !eing

Charged or First " #ears or $oderni%ed $ill

Incremental cash flow for first 5 "ears of modernized mill

= $ 2"21"!0 . $11""0 = $!"2"0

Incremental cash flow for last 15 "ears of modernized mill

=$ /"#0"!0 .$ 11""0 = $ "11!"0

Casio calculator

a) Cash &utton

&) *+ = 1+c) Cash= ,editor x

F

1 .1#/00000

2 !"2"0

% !"2"0

4 !"2"0

5 !"2"0

!"2"0

7 "11!"0

& "11!"0


18/23

"11!"0

10 "11!"0

11 "11!"0

12 "11!"0

1% "11!"0

14 "11!"0

15 "11!"0

1 "11!"0

17 "11!"0

1& "11!"0

1 "11!"0

20 "11!"0

21 "11!"0

d) NPV = sol3e

e) NPV = $ !#"00"/!

f) *44= sol3e

g) *44 = 1#+

*ncremental cash flo' for ne' paper mill

Incremental cash flow for first five "ears

= $ 1"!#"000 . $ 11""0

= $ 1""!0

Incremental cash flow for last 15 "ears

= $ 2#"#"000. $11""0

= $ !"22"!0

Casio calculator


19/23

a) Cash &utton

&) *+ = 1+

c) Cash= ,editor x

F

1 .1!"!00"000

2 1%%,4%%,&0

% 1%%,4%%,&0

4 1%%,4%%,&0

5 1%%,4%%,&0

1%%,4%%,&0

7 &%,2,&0& &%,2,&0

&%,2,&0

10 &%,2,&0

11 &%,2,&0

12 &%,2,&0

1% &%,2,&0

14 &%,2,&0

15 &%,2,&0

1 &%,2,&0

17 &%,2,&0

1& &%,2,&0

1 &%,2,&0

20 &%,2,&0

21 &%,2,&0

d) NPV = sol3e

e) NPV = $ 1!"##!"!#0

f) *44= sol3e


20/23

g) *44 = 1/2+

5odernized mill Ne' mill

NPV of pro9ect 'ith 0 6ear

depreciation

$ "#00"0/1# $ 100"#2"!#0

NPV of pro9ect 'ith # 6ear

depreciation

$ !#"00"/! $ 1!"##!"!#0

*44 of pro9ect 'ith 0 6ear

depreciation

1!12+ 1#1+

*44 of pro9ect 'ith # 6ear

depreciation

1#+ 1/2+

Change in NPV $ 1"#0"#1/1 $ !"002"000

Change in *44 %/%0%4 2/05NPV change in + %%/& &5/54

?" usin3 incremental cash flows also we 3et to 8now that the *ercenta3e chan3e in )-. of new

mill *roect is hi3her/

he )-. chan3e would e hi3her in uildin3 a new mill, *ossile reasons would e the

ma3nitude of earl" and latter cash flows/ ;atter cash flows e#*erience 3reater im*act of discount

rate rather earl" cash flows/ 5 "ear de*reciation ma8es earl" cash flows hi3her/

QUESTION ":Bor calculatin3 the cash flow where the annual *roduction is minimum which ma8es the *roect

unacce*tale we calculate the *a"ment throu3h annuit" formula>

-.= + # ''1'1r(n(r(

R= 12

n= 20

+alculation of +ash Blow Codernization of e#istin3 mill ?uildin3 )ew Cill

+ash Blows 1#"/00"0008((1.(101) .0)801)

=$ 0/110//

1!"!00"0008((1.(101) .0)801

= $ !!1!202


21/23

5inimum annual production

Codernization of e#istin3 mill ?uildin3 )ew Cill

:*eratin3 cash flow $ 20,711,047/27 $ &2,&44,1&/0

;ess> de*reciation ($/"/#"000) ($0"20"000)

)et Income 1"2/"0// #1"20"1!202


22/23

?onnage per Bear:

Gross *rofit = onna3e *er "ear '*rice *er ton 'sales( H variale cost *er ton(

5odernized existing mill tonnage per 6ear= $ 1!/##8 (##. !1) = $ 22/

Ne' mill tonnage per 6ear =$ 1!/02!1!8 (##. /#) = $ 02/01012


23/23

QUESTION 1#:(A)

)o, it is not a**ro*riate to ud3e different *ro*osals on same discount rate ecause each *ro*osal

has its own cost and cost of ca*ital which is accordin3 to its ris8/ 9o, in order to evaluate the

*ro*osals, we should com*are *ro*osalAs own cost of ca*ital with its IRR/ If IRR is 3reater than

that of its cost of ca*ital *ro*osal should e acce*ted otherwise reected/

(%)

!es, it is *ossile that m" decision would e chan3e if oth *roects have different cost of

ca*ital/ +han3e in cost of ca*ital can also chan3e the decision we made on the asis of IRR in

question 5 of selectin3 the *roect of modernization of e#istin3 mill/ If oth *roects would have

hi3her IRR than their discount rate than I would select *roect with hi3her )-./

Greenworld Case SOLUTION

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